Two days after a senior government official said Spain's access to debt markets was closed, the Treasury beat its 2 billion-euro target ($2.5 billion) at a bond sale, easing concern about financing the region's third-biggest budget deficit.

Spain sold its benchmark 10-year bond to yield 6.044 percent, the most since Nov. 17, when the yield in the secondary market reached a euro-era record 6.78 percent. Demand for the security was 3.29 times the amount sold, higher than at the previous auction in April. In the secondary market Spain's 10-year bond yield fell 12 basis points to 5.679 percent.

The auction results were “pretty decent overall and the market appears eminently comfortable with the outcome,” said John Davies, a fixed-income strategist at WestLB AG in London. “A tad above the top end of the target volume range obviously looks good, but I think the more encouraging factor was that the 2022 bond came at 6.04 percent, so safely below levels prevailing in the secondary market.”

Budget Minister Cristobal Montoro said on June 5 that the “door of the markets isn't open to Spain” as he called for European institutions to help the nation shore up its lenders. As Spanish borrowing costs approach the 7 percent level that preceded bailouts in Greece, Ireland and Portugal, the Treasury increasingly depends on domestic banks.

The yield on Spain's 10-year bond dropped the lowest in two weeks. The spread with the same German maturities was at 4.80 percentage points, the lowest since May 25 and down from a record 5.48 percentage points on June 1.

Spain sold 611 million euros of the 10-year bond and another 1.46 million of debt maturing in 2014 and 2016, bringing the total for the auction to 2.07 billion euros. The country has now sold 58 percent of its gross debt issuance needs for the year, the Economy Ministry said in e-mailed statement.

“Spain can clearly still borrow in the markets but it must pay high yields for the privilege,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London, in an e-mailed comment. “Yields are still significantly above the levels seen when these bonds were last auctioned.”

Concern about the country's ailing banks has pushed up Spain's funding costs, while driving down yields in countries considered to be safer, such as Germany and France.

France auctioned 7.84 billion euros of debt today and priced its 10-year bonds to yield 2.46 percent, the lowest at auction in more than 13 years. The Treasury also sold a 50-year bond for the first time since 2010.

May Rally

“In the 10-year area, France has been a notable performer in recent weeks, in doing so bucking the strong widening trend seen in the periphery,” Huw Worthington, a fixed-income strategist at Barclays Capital in London, wrote yesterday in a note to investors.

French bonds were the euro area's second-best performers in May, returning 3.9 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Dutch securities outperformed, earning 4.3 percent in the period, the indexes showed.

Spain is pressing Germany to allow the European Union's rescue mechanism to lend directly its banks, rather than to seek a broader bailout that could force the country to adopt even more austerity measures. Spain's banks are hobbled by 184 billion euros of real estate loans that the Economy Ministry calls “problematic.”

European Central Bank President Mario Draghi said yesterday he also opposed allowing the European Stability Mechanism, the region's new bailout fund, to lend directly to banks. Currently the ESM will only be able to lend to governments that meet certain conditions to tap the funds.

“Have we designed the ESM to become a shareholder of banks in the euro area?” Draghi asked at a press conference in Frankfurt. “The ESM wasn't born for that.”

The yield on Spain's 10-year benchmark bond rose by as much as 100 basis points after the government nationalized the country's third-largest lender, Bankia group, on May 9 and tightened banks' provisions rules. It was the fourth attempt in three years to clean up an industry hobbled by bad real-estate loans.

Spain may wait to decide whether to formally request aid until it has preliminary results of an audit commissioned to determine the real value of the banks' loan books. A first set of conclusions are due in 10 or 15 days, Economy Minister Luis de Guindos said yesterday.

Spain's recourse to a bailout from the ESM “is gradually becoming inevitable” and would drive the nation's credit rating to sub-investment grade, Royal Bank of Scotland Group Plc wrote in a report yesterday. Yields on Spanish securities will climb to at least 10 percent after Spain accesses the ESM bailout, RBS strategists wrote in a separate report published on June 1.

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Spain Beats Bond Sale Goal

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